Bond yields are spiking, oil is up — but investors aren’t giving up on stocks

Surging oil prices and bond yields have made markets choppy in recent weeks — but many investors are digging ing and hoping returns are in sight.

Global government bonds extended a sell-off after the U.S. 10-year Treasury yield breached the closely watched 5% level on Tuesday, while oil has been holding above $100 a barrel as the Iran war's supply shock continues.

Equities have largely been on a tear this year despite a global energy crisis, surging bond yields and bouts of volatile trade amid geopolitical developments, with the S&P 500 adding more than 10.8% so far this year. The tech-heavy Nasdaq Composite has jumped 11.8% year-to-date, while the Dow Jones Industrial Average is up 8.4%. Beyond Wall Street, stocks listed in South Korea, Japan and Europe have also rallied.

As stocks faced more volatility this week after leading AI voices warned the tech was moving too fast to be safe and safeguards were needed, Bank of America's latest Global Fund Manager Survey revealed on Tuesday that many market participants appear undeterred from pouring cash into the stock market.

The survey found that while the "excess bullishness" seen over the summer had faded, investors remained broadly optimistic about growth and earnings, with most expecting continued heavy spending on AI.

A net 49% of money managers remained overweight global equities in September, the survey said, which polled 170 investors overseeing a collective $470 billion in assets. That marked a slight pullback from the previous month, but stocks remained the most common overweight position of any asset class.

Expectations for double-digit earnings-per-share growth over the next 12 months were at their highest since August 2021, the survey found, and 38% of respondents said they expected a global economic "boom" in the coming year.

Allocation to bonds was at its lowest level since May 2022.

In a note on Tuesday, strategists at the BlackRock Investment Institute (BII) said that rising bond yields hadn't knocked them off of their pro-risk stance, though they are "raising the hurdle for returns."

"Higher rates and strong equities need not be contradictory – what drives yields matters," they said. "When higher yields reflect stronger investment and growth, the resulting earnings strength can help offset a higher cost of capital. That explains why we maintain our U.S. equity and AI overweights."

"We think AI-related investment can support growth and profits even as the same investment boom absorbs capital, power and other scarce resources," they added.

Toni Meadows, head of investment at BRI Wealth Management, told CNBC in an email on Tuesday that the "gold rush" mentality around AI meant there would be periods where investors "question which future they are investing for."

"The pace of investment in AI data centres and related infrastructure is insatiable at present but there will be bottlenecks and the circular nature of some revenue streams within the sector ultimately opens 'the AI trade' up to some fragility," he said.

"At present, I doubt the current questions being raised will derail the story, even if we now have a period of reflection and readjustment. We are likely to have a series of pauses in the AI trade – whether they develop into a deeper sell-off depends on how worried investors become about the returns to investment, the funding of spending and the circular nature of revenues in some areas."

Tej Sthankiya, senior investment analyst for impact investing at Federated Hermes, told CNBC that the recent AI sell-off created buying opportunities for longer-term investors.  

"It is difficult to predict how long this [volatility] will go on for as the market's short term risk appetite is heavily influenced by the top-down macro (e.g. rates, oil, geopolitics), where trends have been less benign in recent days and weeks," he said in an email.

"The AI data center build out has been capacity constrained by access to critical semiconductor wafers and power; there are no signs of these bottlenecks abating in the near term," he said.

Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a Tuesday morning note that the key question for investors is not whether frontier development slows, but whether AI demand and monetization will continue to expand.

"We believe the answer is still yes," he said. "We continue to favor a diversified approach across the AI value chain, combining infrastructure beneficiaries (including semiconductors, networking, power, and cloud) with larger platforms and software companies positioned to monetize adoption."

"Stronger AI safeguards may reshape competition, but the proposals so far do not establish that the AI capex cycle is ending," Haefele added.